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Investing Specialists

Opting for Index Funds? Don't Set Yourself Up for Disappointment

There are many compelling reasons to choose index funds; performance-chasing isn't one of them.

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If you pay even passing attention to the asset-management industry, you know the story: Investors have been opting for index funds in a big way. Flows to passive products, both exchange-traded funds and index funds, totaled $413 billion in 2015. That brought the total assets in all passive products to more than $4.5 trillion (yes, trillion, with a "t") at the end of last year.

There are many reasons for this trend. Investors of all stripes--individuals, advisors, and institutions like 401(k) plans--have increasingly gravitated to passive products because of their low costs, predictability, and transparency. Thanks to their low-cost advantage relative to the typical actively managed fund, index funds have generally delivered returns that are solidly above average relative to their category peers. And with many market experts forecasting equity returns in the mid-single digits, the fact that broad-market equity ETFs help reduce the drag of taxes on an investor's return has further burnished their appeal.

Christine Benz does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.